Question

Jacksons Ltd is deciding whether to replace and upgrade their metal-press. They have been advised that a new one would cost $560,000 and have an estimated useful life of 5 years.

Their existing press has a current book value of $120,000 and can be sold for $95,000 today.

The cash operating costs of the old press are $155,000 a year. The new, more efficient, press has annual operating costs of only $60,000 because it requires less workers to operate it.

The old press is being depreciated at $24,000 a year and has a remaining life of five years at which time its scrap value will be zero. The new press will be depreciated on a straight-line basis over a 5 year life and is expected to be sold for $150,000 at the end of 5 years. The ATO have advised for tax purposes the machine should be depreciated to zero over its 5 year life.

If the tax rate is 30% and the discount rate is 13.5%, should Jacksons Ltd buy the new press?

Answer 1

Since NPV is negative the replacement should be rejected

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